UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

__________________________________ 

FORM 10-Q

 (Mark One)

 

x     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

 

or

 

 __________________________________ 

Commission file number 0-2816

 

METHODE ELECTRONICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

See notes to condensed consolidated financial statements.

 

See notes to condensed consolidated financial statements.

1.            BASIS OF PRESENTATION

 

 

2.            RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02 Leases, Accounting Standard Codification (ASC ) 842, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e lessees and lessors). The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognize based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The amendments in this update are effective for fiscal years beginning after December 15, 2018, which is our fiscal 2020, beginning on April 28, 2019. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In July 2015,January 2016, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the2016-01 Financial Instruments - Overall: Recognition and Measurement of Inventory". This ASUFinancial Assets and Financial Liabilities. The new standard requires an entityequity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to measure inventorybe measured at fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets, and eliminates the lower of costrequirement for public business entities to disclose the method(s) and net realizablesignificant assumptions used to estimate the fair value rather thanthat is required to be disclosed for financial instruments measured at the lower of cost or market.amortized cost. The guidance isamendments in this update are effective for interim and annual periodsfiscal years beginning after December 15, 2016, and2017, which is to be applied prospectively. Early adoption is permitted.our

fiscal 2019, beginning on April 29, 2018. We do not believeare currently evaluating the adoption ofimpact this standardguidance will have a significant effect on our consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16 "BusinessBusiness Combinations Simplifying the Accounting for Measurement-Period Adjustments".Adjustments. The standard requires that an acquirer recognize measurement-period adjustments in the period in which the adjustments are determined. The income effects of such measurement-period adjustments are to be recorded in the same period’s financial statements but calculated as if the accounting had been completed as of the acquisition

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU requires an entity to measure inventory at the lower of cost and net realizable value, rather than at the lower of cost or market. The amendments in this update are effective for fiscal years beginning after December 15, 2016, which is our fiscal 2018, which will begin on April 30, 2017. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

    

3.            GOODWILL AND INTANGIBLE ASSETS

 

We review our goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and at least annually in accordance with ASC No. 350, “Intangibles — Goodwill and Other”Others”.  The values assigned to goodwill and intangible assets are normally based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired.  A severe decline in expectations could result in significant impairment charges, which could have a material adverse effect on our financial condition and results of operations.

    

The following tables present details of the Company’s intangible assets:

 

 

 

 

4.            INCOME TAXES

 

At May 2, 2015, we recorded a deferred tax benefit of $7.2 million related to the release of a foreign valuation allowance and a $1.4 million deferred tax benefit related to the release of our state valuation allowance. The Company evaluated all available positive and negative evidence, including past operating results and projection of future taxable income and determined it is more likely than not that expected future taxable income will be sufficient to utilize substantially all of our foreign, federal and USU.S. state net deferred tax assets. The Company maintained a valuation allowance of $1.2$1.3 million at October 31, 2015July 30, 2016 and May 2, 2015April 30, 2016 related to certain state and federal net operating loss carryovers and expects to continue to maintain this allowance until we determine that these deferred tax assets are more likely than not realizable.

At October 31, 2015,July 30, 2016, we had available $2.1 million of federal and $80.6$85.8 million of state net operating loss carry forwards (having a tax benefit of $0.7 million and $3.8$3.7 million, respectively) and $3.7$0.9 million of foreign tax credit carry forwards. If unused, the U.S. federal net operating loss carry forwards will expire in the fiscal years 2018 through 2031. The state net operating loss carry forwards will expire in the fiscal years 20162017 through 2035.2036. The foreign tax credits will expire in the fiscal years 2023 through 2024.2025.

The tax laws of Malta provide for investment tax credits of 30% of certain qualified expenditures. Unused credits of $16.1$14.4 million as of October 31, 2015July 30, 2016 can be carried forward indefinitely. We record investment tax credits using the "flow through" method.

The Company recognized an income tax provision of $5.7$5.5 million and $8.7$7.4 million for the three months ended October 31,July 30, 2016 and August 1, 2015, and November 1, 2014, respectively. The Company's effective tax rate was 21.2%20.6% and 25.1%23.9% for the three months ended October 31,July 30, 2016 and August 1, 2015, and November 1, 2014, respectively. The Company recognized an income tax provision of $13.1 million and $15.7 million for the six months ended October 31, 2015 and November 1, 2014, respectively. The Company's effective tax rate was 22.7% and 24.9% for the six months ended October 31, 2015 and November 1, 2014, respectively. The income tax provision for both the three and six months ended October 31,July 30, 2016 and August 1, 2015 and November 1, 2014 is lower than the U.S. statutory rate primarily due to foreign investment tax credits and foreign operations with lower statutory rates.

We record interest and penalties accrued related to the unrecognized tax benefits in the provision for income taxes.  We had approximately $0.1 million accrued at October 31, 2015July 30, 2016 for the payment of interest and penalties.  The total unrecognized tax benefit as of October 31, 2015July 30, 2016 was $0.9$1.2 million. We recorded an unrecognized tax benefit of $0.1 million in the first half of fiscal 2016. There have been no material changes to the accrued amounts in the current fiscal year.

  

The Company and all of its domestic subsidiaries file income tax returns in the U.S. federal jurisdiction and various states.  Our foreign subsidiaries file income tax returns in certain foreign jurisdictions since they have operations outside the U.S.  The Companyfederal and its subsidiaries are generally no longer subject to U.S. federal, state and local examinations by tax authoritiesstatute of limitations remains open for all years exceptthe fiscal 2014, 2013, 2012 and 2011.year ended April 27, 2013.

 

5.            COMMON STOCK AND STOCK-BASED COMPENSATION

 

TheIn the aggregate, the number of RSAs earned will vary based on performance relative to established goals for fiscal 2020 adjusted EBITDA, with 50% of the target shares earned for threshold performance (representing 342,000411,000 shares), 100% of the target shares earned for target performance (representing 684,000822,000 shares) and 150% of the target shares earned for maximum performance (representing 1,026,0001,233,000 shares).

At the target level of performance, the expected expense for the RSAs over the five-year period will be $21.8$24.8 million. During the quarterthree months ended October 31, 2015,July 30, 2016, the Company recorded $0.4$1.3 million in compensation expense related to the RSA’s.RSA's. There was no compensation expense recorded for the RSA's for the three months ended August 1, 2015.

    

As of October 31, 2015,July 30, 2016, the Company is recording the RSA compensation expense based on target performance. In future periods, if management makes a determination that exceeding the target will likely be exceededis probable for fiscal 2020, a catch-up adjustment to compensation expense will be recorded in that period. This amountIn addition, if management makes a determination that it is probable of not exceeding the target for fiscal 2020, a reversal of expense will be recorded in that period. These amounts could be material to the financial statements.

The Company also granted 516,000608,000 RSU's to key employees. The RSU’s are subject to a five-year vesting period, with 30% vesting on on each of April 28, 2018 and April 27, 2019 and 40% vesting on May 2, 2020. The total expense for the RSU's is expected to be $16.5$18.5 million through 2020. During the quarterthree months ended October 31, 2015,July 30, 2016, the Company recorded $0.4$1.3 million of compensation expense related to the RSU's. There was no compensation expense recorded for the RSU's for the three months ended August 1, 2015.

6.            NET INCOME PER SHARE

 

Basic net income per share is calculated by dividing net income attributable to Methode shareholders by the weighted average number of common shares outstanding for the applicable period.  Diluted net income per share is calculated after adjusting the denominator of the basic net income per share calculation for the effect of all potentially dilutive stock compensation awards outstanding during the period.

 

The following table sets forth the computation of basic and diluted net income per share:

 

 

7.            SEGMENT INFORMATION

 

We are a global manufacturer of component and subsystem devices.  We design, manufacture and market devices employing electrical, electronic, wireless, sensing and optical technologies.  Our components are found in the primary end markets of the automotive, appliance, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), aerospace, rail and other transportation industries, and the consumer and industrial equipment markets.

 

ASC No. 280, “Segment Reporting”, establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources.  The CODM, as defined by ASC No. 280, is the Company’s President and Chief Executive Officer (“CEO”).

The Automotive segment supplies electronic and electromechanicalelectro-mechanical devices and related products to automobile Original Equipment Manufacturers ("OEMs"), either directly or through their tiered suppliers. Our products include controlintegrated

center consoles, hidden switches, for electrical powerergonomic switches, transmission lead frames and signals, connectors for electrical devices, integrated control components, switchessensors which incorporate magneto-elastic sensing and sensorsother technologies that monitor the operation or status of a component or system, and packaging of electrical components as well as design and manufacture of magnetic torque sensing products.system.

 

The Interface segment provides a variety of copper and fiber-optic interconnectinterface and interface solutions for the aerospace, appliance, commercial food service, computer, construction, consumer, material handling, medical, military, mining, networking, point of sales, storage, and telecommunications markets.  Solutions include conductive polymers, connectors, custom cable assemblies, industrial safety radio remote controls, optical and copper transceivers, personal computer and express card packaging and terminators, solid-state field effect interface panels, and thick film inks.consumer touch panels. Services include the design and installation of fiber optic and copper infrastructure systems, and manufacturing active and passive optical components.

 

The Power Products segment manufactures braided flexible cables, current-carrying laminated bus devices, custom power-product assemblies, such as our PowerRail solution, high-current low voltage flexible power cabling systems and powder coated bus bars that are used in various markets and applications, including aerospace, computers, industrial and power conversion, military, telecommunications, and transportation.

 

The Other segment includes medical devices, inverters and battery systems and insulated gate bipolar transistor solutions. Our medical devices business includes Dabir Surfaces which is our surface support technology aimed at pressure ulcer prevention. Methode is developing the technology for use by patients who are immobilized or otherwise at risk for pressure ulcers, including patients undergoing long-duration surgical procedures.

 

 

 

Certain litigation arising in the normal course of business is pending against us.  We are from time to time subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, breach of contracts, employment-related matters, environmental matters and environmentalintellectual property matters.  We consider insurance coverage and third-party indemnification when determining required accruals for pending litigation and claims.  Although the outcome of potential legal actions and claims cannot be determined, it is our opinion, based on the information available, that we have adequate reserves for these liabilities.

 

We incur pre-production tooling costs related to certain products produced for our customers under long-term supply agreements.  We had $9.4$13.2 million and $10.5$9.5 million as of October 31, 2015July 30, 2016 and May 2, 2015,April 30, 2016, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling.  Engineering, testing and other costs incurred

 

 

 

 

Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties.  We undertake no duty to update any such forward-looking statements to conform to actual results or changes in our expectations.  Our business is highly dependent upon two large automotive customers and specific makes and models of automobiles.vehicles.  Our results will be subject to many of the same risks that apply to the automotive, appliance, computer and communications industries, such as general economic conditions, interest rate fluctuations, consumer spending patterns and technological changes.   Other factors which may result in materially different results for future periods include the following risk factors. Additional risks and uncertainties not presently known or that our management currently believe to be insignificant may also adversely affect our financial condition or results of operations.  These risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because these factors could cause our actual results and condition to differ materially from those projected in forward-looking statements.  The forward-looking statements in this report are subject to the safe harbor protection provided under the securities laws and are made as of the date of this report.

Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those foreseen in such forward-looking statements.  These forward-looking statements speak only as of the date of the report, press release, statement, document, webcast or oral discussion in which they are made.  We do not intend to update any forward-looking statements, all of which are expressly qualified by the foregoing.  See Part I — Item 1A, Risk Factors of our Form 10-K for the fiscal year ended May 2, 2015,April 30, 2016, for a further discussion regarding some of the reasons that actual results may be materially different from those we anticipate.

 

 

 

Our components are found in the primary end markets of the aerospace, appliance, automotive, construction, consumer and industrial equipment markets, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), rail and other transportation industries.

 

In September 2015, the Board of Directors authorized the repurchase of up to $100 million of the Company's outstanding common stock through September 1, 2017. The Company has purchased $22.8 million1,997,298 shares of outstanding common stock for $62.0 million as of October 31, 2015.July 30, 2016. The Company did not purchase shares during the first quarter of fiscal 2017. The program may be suspended or terminated at any time.

 

 

Below is a table summarizing results for the three months ended:

($ in millions)

(“N/M” equals not meaningful) 

 

sales for the three months ended October 31, 2015July 30, 2016 decreased reported net sales by $4.6$0.7 million, or 2.2%0.4%, due to average currency rate fluctuations in the secondfirst quarter of fiscal 2016,2017, compared to the secondfirst quarter of fiscal 2015,2016, primarily due to the strengthening of the U.S. dollar compared to the euro.Chinese yuan.